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National Bank of Azerbaijan further cuts discount rate

01 December 2008 09:27 (UTC +04:00)

Under the decision, compulsory reserve requirements on banksâ€™ liabilities in national and foreign currencies decreased to 6% from 9%.
â€œIn the face of deepening global economic crisis, dynamic economic growth rate continues to be at the double-digit level in the country. Azerbaijanâ€™s foreign exchange position further improved and foreign exchange balance surplus reached US $15 billion. Inflation appears to slow down, and in such circumstances the central bank are taking monetary policy measures in order to more preventively neutralize external risk factors. These measures bode well for the protection of high liquidity level and assets quality in the banking system and the deepening of financial stability,â€ said the central bank in a statement.
According to the central bank, keeping up the level of liquidity provides for the sustainability of bank lending and plays important part in protecting economic growth rate in the non-oil sector.
The key rate cut is aimed at loosening monetary policy.
That is to say, easing monetary policy is needed and this shows that there are problems emerging in the banking system. Despite the restriction of consumer lending, commercial banks were faced with a liquidity problem, as proved by the sharp decline in repo transactions and an increase in the centralized credit market.
Thus, the central bank helps banks to solve the problem of liquidity, by making funds cheaper and reducing reserves.
At the same time, it should be noted that the external debts owned by Azerbaijan-based banks reached AZN 2 billion, a historical high level. This poses a serious threat to the national banking system, given the likelihood of bankruptcies of major financial institutions.
It should be noted that a decision to abolish the reserve requirements may be more profitable for banks than cutting key rates.
In general, the credit market is be expected to intensify after the rates were lowered, otherwise, this step would be futile, and the rate cut would remain a theoretical figure playing no role in the rehabilitation of the banking system.